Mortgage Insurance Premium (MIP) is a kind of insurance on repayment of loan. The insurance is a guarantee if the client defaults. With this insurance, the lender will not suffer from loss of loan. Specifically, MIP is the insurance on loan which is guaranteed by Federal Housing Authority. In this case, FHA as if creates the rules which regard MIP payment by the homeowners. Why MIP is always be recommended to borrowers? Mortgage carries risk. The borrowers might fall on their monthly-payments or default.
Monthly and Upfront Premiums
The loans for houses need high payments. It’s usually 20 percent of total purchase price. With a MIP agreement, the payment with FHA-guaranteed loan drops to 3,5 percent. This percentage will depend on buyers’ qualifications. Mortgage insurance provides some economic benefits like more clients, more active property market, and more qualified clients. Talking more about Mortgage Insurance Premium, monthly and upfront premiums are very familiar. These two sorts may be often mentioned in this article. The most updated info says that FHA requires MIP upfront payment at 1,75 percent of clients’ loans. This amount can be paid as the part of clients’ mortgage loans. What about the monthly premium? A monthly premium or a renewal premium is only 1,2 percent of loan if the loan and house value is equal or less than 95 percent.
The homeowners can cancel their MIP after they have made routine mortgage payments. For 30-year-loan with FHA-guaranteed, the cancelation can be done after 5 years and when the ratio of homeowners’ loans-to-value has reached 78 percent. A house valued $100,000, for instance, FHA-guaranteed mortgage insurance can be cancelled after the value of mortgage principal reaches $78,000. Remember, the period of mortgage insurance premium has passed 5 years. The terms of cancellation vary. For industry, the cancellation is permitted if the client has 20% equity of home. This amount of equity must be based on the newest appraisal of home value.
MIP and PMI are two different sorts?
PMI (Private Mortgage Insurance) is an insurance policy that is used on conventional loan. This type of insurance protects the lender, not the client, from the risk of foreclosure and default. The insurance allows the clients (especially the clients who can’t be able to make down payment) to get mortgage financial support with affordable rates. If the client purchases a new home with less than 20 percent, the lender will reduce the risk by asking him/ her to take PMI agreement from PMI Company. The amount of PMI payment varies. It depends on down payment and loan the client pay off (it’s about 0,5 to 1 percent of total of loan).
There are two options of PMI premium: monthly and upfront premiums. Like its name, a monthly premium is paid per month until the PMI is terminated (the loan balance reaches 78 percent of home value). It can be canceled if the client has adequate equity or the client has reached midpoint of mortgage period (a 30-year-loan, for instance, can reach the midpoint after the client has passed 15 years). An upfront premium is another option you can take. This premium is also called a single premium of PMI. This premium allows you to pay a single upfront-premium or in full sum of money as the mortgage insurance. Such mortgage payment is called lender-paid PMI or LPMI where PMI cost is included in the rate of mortgage interest for the rest of loan life.
On the other hand, Mortgage Insurance Premium is the policy of insurance which is used on FHA loans and it is required if the down payment is less than 20 percent. FHA uses both upfront and monthly premiums. The rate which is paid per month will depend on the length of loan period and LTV (loan-to-value) ratio. Loan with FHA assigned before June 2013, FHA needs you to make monthly premium payment for full five years before MIP can be fallen (if the loan term is more than 15 years). A Mortgage Insurance Premium can be dropped if the balance of loan has touched 78 percent of home value. But if your FHA loan is assigned after June 2013, there are new rules. If your Loan-to-Value is 90 percent or less than 90 percent, MIP payment has to be paid for eleven years. If your Loan-to-Value is more than 90 percent, however, PMI payment can be paid for the rest of loan life.